China Stocks, Bonds Fall After Beijing Disappoints

The paramilitary policemen patrol outside the Great Hall of the People where the Communist Party’s 205-member Central Committee gathered for its third annual plenum on November 12, 2013 in Beijing, China.

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Chinese shares and bonds fell Wednesday as a landmark Communist Party meeting failed to deliver detailed fresh reform measures and hinted at a tighter monetary policy to aid Beijing transform the world’s second biggest economy.

At the end of a four-day confab called the Third Plenum, China’s new leaders signaled broad-based roadmap for overhauling the economy in the coming decade, saying market forces would play a “decisive” role in future economic decisions.

The closely-watched but vaguely-worded communique called for fewer investment restrictions, greater rights for farmers and a more transparent system for local and national government taxing and spending and hint at a bigger role for the private sector in the economy.

However, the document failed to offer specific plans for addressing more imminent issues challenging China’s economy, such as revamping or partially privatizing the cumbersome state-run enterprises and further liberalizing the country’s currency and interest rate policies.

In mid morning trading, the benchmark Shanghai Composite Index was down 1.2% at 2100.64.

“Retail investors had high expectations for the Third Plenum. But the communique failed to address how the government will proceed with a range of vexing issues, such as reforms in the state-run financial sector and household registration,” said Amy Lin, senior analyst at Capital Securities.

Leading the broad-based losses are major state-run firms, ranging from energy suppliers to banks and car makers as the communique stressed pushing for “a modern corporate system” for the state-owned enterprises, instead of explicitly calling for increased privatization, analysts said.

“Based on the language of the communique, the government is putting equal emphasis on both the state and private sectors, which led to a pullback in stocks that investors had hoped would benefit from more privatization,” said Central China Securities analyst Zhang Gang.

Bucking the weakness in the broader market, defense and media companies strengthened after the Communist Party called for the establishment of a National Security Council and vowed to deepen reforms of the army. The leadership also called for further developing the country’s cultural industry, which includes the media sector in the country.

Aerosun Corp., military equipment supplier, surged by the 10% daily limit, with AVIC aero-Engine Control up 4.5%.

China’s bond market also extended its recent weakness, responding to Beijing’s pledge to transform the economy into a consumption-driven model, overhaul the fiscal system as well as arrest the fast buildup of state and corporate debt.

The benchmark seven-year govenrment bond yield rose 18 basis points to 4.46%, with that on the 10-year paper up 3 bps at 4.43%.

China’s yuan was largely steady against the U.S. dollar, as investors await more details to emerge from the broad-brush reforms that Beijing outlined in Tuesday’s communique.

The dollar-yuan exchange rate was at 6.0912, compared with Tuesday’s close of 6.0919.